Strick v Regent Oil Company Ltd ; Regent Oil Company Ltd v Commissioners of Inland Revenue

JurisdictionEngland & Wales
Judgment Date08 June 1964
Judgment citation (vLex)[1964] EWCA Civ J0608-2
Date08 June 1964
CourtCourt of Appeal
Charles Gordon Strick (H. M. Inspector of Taxes)
Regent Oil Company, Limited
And Between
Commissioner of Inland Revenue
Regent Oil Company, Limited (Appeal of the Respondent)

[1964] EWCA Civ J0608-2


The Master of the Rolls

(Lord Denning)

Lord Justice Danckwerts

Lord Justice Diplock

In The Supreme Court of Judicature

Court of Appeal

(Revenue Paper)

Mr. H. H. Monroe. Q. C. and Mr. J. Raymond Phillips (instructed by the Solicitor of Inland Revenue, Somerset House, Strand, London, W. C.2.) appeared as Counsel on behalf of the Appellants.

Mr. Roy Borneman, Q. C. and Mr. Stewart T. Bates (instructed by Mr. J. G. Senior, 117, Park Street, London, w. l.) appeared as Counsel on behalf of the Respondent.


The facts appear from the Case Stated in this case and in the previous case of Bolam v. Regent Oil Co. Limited. (1956) 37 Tax Cases, and I will only state sufficient to Show thee problem. There are three large suppliers of petrol in this country – Shell, Esso and Regent. Since the war there has bean intense competition between them. Each of these three great companies has sought to get the owners of garages or filling stations to sell its brand of petrol only, and not to sell the brands of others. Each seeks to get the retailer to sell its brand of petrol exclusively. The competition is so intense that they call it an "exclusivity war." The retailers have not been slow to take advantage of this war between the giants. They have bid the one against the other. They ask each of the big companies: "What will you pay me if I tie myself to your products?" In the early stages the inducement held out by each company was a simple rebate. The company would offer the retailer a rebate of a farthing or thereabouts on every gallon of petrol if he would promise to sell its brand to the exclusion of all others. The retailer would tie himself to the company offering the moat rebate. Competition forced the rebates up. The next stage was that instead of a rebate, the company paid a sum in advance to the retailer each year according to the estimated gallonage for the coming year. So the retailer received cash in hand at the beginning of the year, and then at the end of the year the figure was adjusted up or down according to the gallonage actually supplied. The retailer would tie himself to the company offering the best advance payment. The third stage was, that instead of an advent for one year, the company paid a lump sum in advance for five or six years ahead; and this was adjusted up or down afterwards according to the gallonage sold. That was the stage reached in Bolam's case where Mr. Justice Danckwerts held that these advance payments made by a company were payments of a revenue nature. They were not capital expenditure. They could be deducted by the company in calculating its profits for tax purposes.


We have now reached a further stage. Some of the retailers have taken even greater advantage of their bargaining position. They have extracted from the oil companies a sum in advance which is not to be returned in any circumstances, and furthermore, in such a form that the retailers hope it will not be taxable in their hands. This form is known as "lease sub-lease."


I will describe it by reference to one of the cases. First, the lease. Green Ace Motors owned a garage and filling station in the Norwich Road at Ipswich. On the 11th June, 1956, the Regent Oil Company paid Green Ace Motors the sum of £5,000 which was described as "paid by way of premium." In return, Green Ace Motors demised to the oil company the garage and filling station for ten years from the 13th May, 1955 at a rent of £1 a year. The £5,000 was calculated in this way:- It was estimated that the Green Ace company would, during the ten years, sell 1,200,000 gallons of petrol, and that the rebate on that gallonage would be at about 1d. a gallon. That comes to £5,000 over the ten years. Secondly, the sub-lease. On the same day, the 11th June, 1956, the oil company sub-let the property back again to Green Ace Motors. They sub-demised it for ten years less three days from the 13th May, 1955, but a rent of 21 a year. This sub-lease contained a specific covenant which tied Green Ace Motors to the oil company. They covenanted that during the term of the sub-lease they would buy all their requirements of motor fuels from the oil company and they would not sell any other fuel except that supplied by the oil company. They covenanted also to keep the premises open for the supply of fuel and not discontinue business or reduce the number of pumps. They could only assign the premises if they got a responsible person who would covenant to observe the tie. Thirdly, additional payment. On the same day, the 11th June, 1956, the oil company agreed that if during the ten years the Green Ace Motors company bought from them more than 1,200,000 gallons, they would pay or allow by way of rebatea penny a gallon on every gallon over 1,200,000. In other words, if the Grew Ace company sold more than the estimated gallonage, they were to receive extra payment. But there was no provision for any adjustment if they sold less than the estimated gallonage. There was no provision for a repayment of any part of the £5,000. The oil company made similar agreements with the other owners of garages, hut usually for longer terms of years and bigger payments. In some cases the sum paid was not described as a "premium" but just as a "sum."


The question is whether the £5,000 and similar sums which the oil company thus paid, were sums employed by the oil company as capital in its trading; for if they were, the oil company was not entitled to deduct them in computing its profits (see Section 137, sub-section (f) of the Income Tax Act, 1952). But if they were of a revenue nature, of course, they could be deducted. The Commissioners held that the payments were properly to he deducted as of a revenue and not of a capital nature. Mr. Justice Pennycuick held that the Commissioners could not reasonably come to that conclusion. Ha held that they were payments of a capital nature.


We were referred to several authorities on this subject, particularly the well-known words of Lord Cave in British Insulated Cables and Atherton in 1925 Appeal Cases and of Lord Macmillan in Van den Bergh and Clark in 1935 Appeal Cases, and the recent application of those principles in the opencast mining cases of Knight v. Calder Prove Estates, in 35 Tax Cases, and Rorke v. Inland Revenue Commissioners in 1960 Weekly Law Reports. If you look at the transaction according to its legal form, the payment of the lump sum was to my mind clearly expenditure of a capital nature. It was paid by the oil company so as to acquire a lease for a term of years at a nominal rent. Whether described by the parties as a "premium" or as a "sum", it was nothing more nor less than a premium paid for a lease. If the company had paid an annual rent for the term of years, the payments of rent, of course, would be of a revenue nature, but a premium paid at the beginning is clearly capital expenditure. It is a sum paid once for all so as to acquire a permanent asset. If this company had put this permanent asset to profitable use by sub-letting it at a rack rent, the premium would clearly be capital used to produce revenue. So also...

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